When to Claim Social Security

Today Mellody Hobson talks about the right time to claim social security.

You can start collecting Social Security anytime from age 62 to 70, but the later you start, the bigger your benefit. Just how much bigger depends on when you were born. People born from 1943 to 1954 have a “normal” or “full” retirement age of 66. They get 25% less than their normal benefit if they cash in at 62 and 32% more than their normal benefit if they wait until 70. (People born later have a slightly higher “normal” retirement age and take a somewhat bigger hit for claiming their benefits early and a somewhat smaller bonus for waiting until 70.)

Say you are turning 62 in June 2013 and earn $50,000 a year. You could collect about $1,011 a month as a single if you retire at 62, or $1,420 a month (in today’s dollars) at your full retirement age of 66 in 2015, or $1,972 a month (again in today dollars) starting in 70 in 2019. If you’re earning $150,000, the comparable monthly amounts would be $1,840 at 62, $2,501 at 66, and $3,370 at 70.

While those benefit amounts sound dramatically different in theory, the system is neutral—meaning if you live to an average age, you’ll end up with roughly the same total benefit no matter when you claim.

But that’s not really true. The most obvious example is that women live longer, but benefits aren’t adjusted by sex. So women are more likely to live past the “break-even age”—that is, the age at which waiting to collect a bigger check pays off.

So how do you decide when to claim Social Security?
There is no pat answer, but I can give your listeners a few guiding rules. First, if you’re still working, don’t claim benefits before your full retirement age. This is the rule thumb that nearly every expert can agree on. You shouldn’t claim early while you’re still employed unless you truly need the money to survive, because it comes with hefty penalties. Until you reach the full retirement age, for each $2 you earn in 2013 above $15,120, you lose $1 of your annual Social Security benefits. By contrast, after 66, benefits don’t get cut no matter how much you earn. If you’re working, try to wait. And one more thing. Don’t take the money early thinking you’ll make more by investing it: If you invested the money, you would need to earn more than 7% annually to equal what you’d make by delaying benefits until full retirement age.

Who’s to say Social Security is even going to be around by the time I reach retirement age?
That’s a common concern, and a valid one: The trustees who oversee Social Security say the program’s trust funds will run dry in 2033, leaving Social Security with only enough revenue to pay about 75 percent of benefits. Already, the program is paying out more in benefits than it collects in payroll taxes.